Econintersect: Mohamed A. El-Erian, PIMCO’s CEO and co-CIO, has posted a wide ranging post wrapping up their annual Secular Forum. Because the balance sheets of the advanced economies are so far out of balance, the average market risk spread on advanced economies now exceeds that on emerging economies.
These realities are playing out notwithstanding bold policy reactions in advanced countries aimed at mitigating them and delivering a more “normal” recovery. Indeed, for most of the post-crisis period, policymakers (particularly in the U.S.) have been fixated – and understandably so – on stimulating growth through aggressive fiscal and monetary policies. Indeed, some policymakers have even embraced explicit initiatives to boost asset prices, driving a significant wedge between economic fundamentals and turbo-charged asset valuations.
The view of the future from this forum.
Looking forward, there are some encouraging signs that speak to an accelerated healing of the global economy over the next three to five years, its growing resilience and, within this, the ability to remove in an orderly fashion the exceptional support provided by unconventional policy actions. There are also signs that suggest that emerging economies are well anchored on their historical development breakout journey; and that China, in particular, will be able to navigate what is inherently a complicated middle income development transition.
The consensus is that core inflation will exceed the Federal Reserve targets. PIMCO will profit from all the “new normal” dynamics in play with inflation, growth and credit.